On Thursday, March 11, 2021, President Biden signed into law the $1.9 trillion American Rescue Plan. Below are highlights of the bill:
If your adjusted gross income (AGI), based on your 2019 or 2020 tax return, whichever is the most recent on file with IRS, is less than or equal to $75,000 for single filers or $150,000 for married filers then you will receive $1,400 per taxpayer and dependent in your household. For example, a married couple with 3 dependent children would receive $7,000 if they were within the AGI limits.
If your AGI is between $75,000 to $80,000 for single filers or $150,000 to $160,000 for married filers, then your rebate will be reduced by the amount your AGI exceeds the lower end of the threshold divided by the difference of the upper and lower end of the threshold. For example if a married couple with 3 dependent children has AGI of $155,000, their $7,000 stimulus would be reduced by 50% ($5,000 / $10,000) to $3,500. However, there is still an opportunity to possibly receive the full amount of the stimulus if your 2021 AGI is below the threshold. See below.
If your AGI is greater than or equal to $80,000 for single filers or $160,000 for married filers, then you won’t receive any stimulus. However, there is still an opportunity to possibly receive a stimulus if your 2021 AGI is below the threshold. See below.
Interestingly enough, if you made too much money in 2019 or 2020 to qualify for the full stimulus or if you only received a partial stimulus, you still could qualify for the full stimulus if your 2021 AGI is below the threshold. This would happen once you filed your 2021 tax return next year.
Planning Tip #1: If your AGI in 2019 was under $75,000 for single filers or $150,000 for married filers, but your 2020 AGI was over $80,000 for single filers or $160,000 for married filers, then it would benefit you to NOT file your 2020 tax return until after the stimulus checks are issued. This will allow you to qualify for the stimulus.
Planning Tip #2: If your AGI in 2019 was over $80,000 for single filers or $160,000 for married filers, but your 2020 AGI was under $75,000 for single filers or $150,000 for married filers, then you will receive the stimulus check once your 2020 tax return is filed. As such, you should file your 2020 tax return as soon as you can. As it stands today, you must file your tax return by 7/15/2021 in order to qualify for the stimulus. You CANNOT delay until the normal tax filing extension date of 10/15/21.
Stimulus checks or direct deposits are expected to go out as early as this weekend.
The stimulus benefits are not taxable as they are technically considered a tax credit and not income.
Child Tax Credit
Parents who have children age 17 and under could receive a child tax credit of $3,000 for each child between the ages of 6 to 17 (as of 12/31/2021) and $3,600 for each child under age 6 (as of 12/31/2021). The credit will be received in full if AGI in 2021 is less than or equal to $75,000 for single filers or $150,000 for married filers.
The credit is reduced by 5% for every dollar that the AGI exceeds the threshold. However, the credit will not be reduced below $2,000 per child so long as AGI is less than or equal to $200,000 for single filers or $400,000 for married filers. For every dollar that AGI exceeds these limits, the $2,000 per child benefit will be reduced by 5%.
What’s strange about this credit is that 50% of it will be paid in equal monthly installments from 7/1/21 to 12/31/21 with the remainder being paid when you file your 2021 taxes. Information from your 2019 or 2020 tax return will be used to determine eligibility. Unlike the stimulus payment though, you will be required to repay the credit if you end up making too much money in 2021.
Child and Dependent Care Tax Credit
If you pay someone to provide care (i.e. daycare) for your child (under the age of 13 for the whole year) then you may be eligible to receive the full tax credit if your AGI is less than or equal to $125,000. The credit is equal to 50% of eligible expenses up to $8,000 for 1 child or $16,000 for 2 or more children. These figures are considerably higher than pre-American Rescue Plan ($15,000 AGI limit, 35% of eligible expenses, and $3,000 / $6,000 maximum eligible expenses).
If your AGI exceeds $125,000, your 50% credit will be reduced by 1% for every $2,000 of AGI that exceeds $125,000 until you reach 20%. If your AGI exceeds $400,000, your 20% credit is reduced by 1% for every $2,000 of AGI that exceeds $400,000 until it eventually reaches 0%. In other words, if your AGI reaches $440,000 you will not receive this credit.
Unemployment income can continue to be received through 9/6/21. This includes the regular weekly amount you would receive from your state plus an additional $300 per week.
For unemployment income received in 2020, up to $10,200 per spouse can be considered tax-free so long as AGI is less than $150,000 (must include unemployment income in AGI calculation to determine total AGI). It doesn’t appear that this tax-free benefit applies to unemployment income received in 2021.
If you are laid off from your employer, the American Rescue Plan has a provision that allows you to continue COBRA from April 2021 through September 2021 at $0 cost. This is due to a tax credit that the federal government is paying to employers.
Regarding health insurance purchased through a state-run exchange (i.e. Obamacare), the maximum amount of money an individual is expected to pay has been reduced for 2021 and 2022. The rates range from 0% to 8.50% of income which is down from 2% to 9.50%. An interesting provision here is that if you qualify for at least one week of unemployment income in 2021, you would automatically qualify to receive an Obamacare policy at no cost even if you made a lot of money prior to being unemployed.
Planning Tip: If you are laid off and have at least one week of unemployment income, you’ll need to determine which insurance (COBRA or Obamacare) provides you with the best coverage and choose that option. If COBRA is the best, then you’ll likely choose that first and then switch to the Obamacare policy afterwards. If the Obamacare policy is best, then you’ll likely forego the free COBRA coverage and just sign up for Obamacare.
Any student loan debt (both Federal and private loans) that is forgiven from 2021 through 2025 will be excluded from income.
Hope you enjoyed the summary. One thing to be aware of is that many of the provisions are tied to AGI, so if you’re expected to go over the limit and you won’t qualify for certain benefits, then you may want to reduce or delay income so that you do qualify. Some ways to do this would be to defer any bonuses to 2022, contribute more to your pre-tax 401k, or make a Traditional IRA contribution. If you have any questions at all, please feel free to reach out.
Have a great weekend and keep an eye out for those stimulus checks or direct deposits!
CERTIFIED FINANCIAL PLANNER™